Friday, August 12, 2016

A study by the Council of Economic Advisors for
the Office of the President looks at a critical factor in the current labor
force; the decline in the labor force participation rate for prime-age males
between the ages of 25 and 54. This is the age range where workers are at
their most productive and the decline in the participation rate is worrisome
for both the financial well-being of men and their families as well as for the
economy as a whole. Please keep in mind that the labor force consists of
men that are either working or actively seeking work.

Here is a chart showing
how the labor force participation rate for prime-age men has dropped since 1948
with recessions marked with vertical grey strips:

The male prime-age labor
force participation rate declined from its peak of 98 percent in 1954 to around
96 percent in the mid-1960s and began to decline significantly between 1965 and
1975 when it dropped from 96.7 percent to 94.2 percent. From that time
forward, the participation rate dropped during and after each recession,
declines that were not fully reversed with each subsequent economic expansion. Since
1965, the prime-age male labor force participation rate has declined by an
average of 0.16 percentage point each year, to its current level of 88 percent.
In the latest economic cycle, the rate of labor force participation for
prime-age men dropped from 91.5 percent in January 2007 to 87.9 percent in
October 2013 and has barely budged upwards since, ranging from 88 to 89
percent.

Not only has the
prime-age labor force participation rate dropped but a significant majority of
the men who reported that they are not part of the labor force in a given month
also report that they have not worked in the previous year. This level
has gradually risen over the past two decades as shown on this graphic:

In large part, the
increase in male non-employment is affiliated with less-educated men.

Let's look at the global
picture, showing how bad the situation is in the United States compared to
other advanced economies (i.e. OECD nations) using data points from 1990 and
2014 for comparison:

Since 1990, the United
States has had the second largest decrease in prime-age male participation
among all OECD nations with the United States ranking third lowest among all 34
nations in the group compared to 10th lowest out of 24 in 1990.

Interestingly, as well,
if we compare the prime-age male non-employment in the United States to its
OECD peers, we see that it is rather high:

Who are the prime-age
male labor force non-participants? While prime-age male participation has
dropped right across all demographic groups, it has fallen more for younger
birth cohorts, African Americans, the less-educated, non-parents, native-born,
those living in the South and veterans. What is surprising is that the
overall trend of rising educational level should have led to increases in labor
force participation rates.

Here is a graphic showing
how prime-age male labor force participation has changed between 1971 and 2015
by race and ethnicity:

...and by education:

Note that the
percentage of prime-age men with a high school diploma or less fell from 97
percent in 1964 to 83 percent in 2014.

Why has there been such a
substantial decline in the prime-age male labor force participation rate?
Let's look at some reasons that only partially explain the issue.
Over the period from 1985 to 2015, the share of non-participating
prime-age men has fallen from 28 percent to 16 percent suggesting that at least
some men do not want to work at the jobs that are available. As well,
prime-age males are providing only a portion of household income with spouse's
earnings helping to meet household financial demands. This logic is not
completely solid since fewer than 25 percent of prime men who are not in the
workforce have a working spouse. The authors of the study also note that
it appears that men and women who are successfully employed tend to pair up
with others who are successfully employed rather than those who are not.
Another hypothesis suggests that prime-age men are staying at home more
often to participate in household duties. By examining the American Time
Use Survey, the authors found that there is little evidence that men who stay
at home are spending any more time on household duties than their employed
counterparts.

The one key factor that
appears to explain much of the drop in prime-age male participation is
connected to the declining labor market opportunities for low-skilled labor and
the resulting stagnation in real wage growth. As well, middle-skilled
workers began to displace lower-skilled workers during the 1990s. Some of
this is due to technological changes in the workplace as well as international
trade deals that have decimated the manufacturing sector since 2000 when China
was admitted to the World Trade Organization as shown on this graphic which
shows manufacturing employment as a share of total non-farm employment between
1939 and 2016:

As well, when compared to
its OECD peers, United States labor markets are much less
"supportive"; the U.S. spends 0.1 percent of GDP on policies such as job
search assistance and job training compared to the OECD average of 0.6 percent
of GDP putting the United States in third last position ahead of only Chile and
Mexico.

The drop in the prime-age
male labor force participation rate will have a significant impact on the
American economy and household finances in the future. Males between the ages of 25 and 54 are
at their earning prime, a period when they should be setting aside funds for
their retirement and paying down their mortgages. Obviously, with a decrease in
the prime-age male participation rate, the "normal" progression from
worker to retiree will be difficult for an increasing number of households.

2 comments:

I see these charts a lot. Being in the labor recruiting technology industry, I need to add something to this to put things in proper perspective.

The Baby Boomer Generation had almost 76 million people in it. The Generation behind them, Gen X, has only 38 million. Millineals have almost 74 million.

That being said, there is going to be a significant drop in the labor participation rate as BBs will be retiring faster than Gen X and Millennials will fill it. The participation rate will climb again as the entire Millennial generation enters the workforce, but the drastic population difference between Baby Boomers and Gen X must be taken into account when discussing the drop in labor participation rate.

Good point that you have to account for the size of the age group cohorts, and consider any impact that could be attributable solely to the differing sizes of the cohorts. But taking the above article at its word, it was focused only on prime aged males - between 25 and 54 and also on the percentage of males within that age group over time that were "particpating" (presumably meaning employed) in the labor market. So both the larger numbers of "baby boomers" reaching retirement age than the number of GenX'ers/Millenials replacing them in the relevant age range (a differential that presumably will reduce over time, as the number of Millenials is almost equal to the number of baby boomers) and the relative sizes of the different age cohorts should be largely irrelevant - if the participation rate is X% in a given year, the fact that it is lower than X% in a later year ceratinly means that a smaller share of the "prime working age men" in that later year were "participating" in the labor market than the share of "prime working age men" who participated in the labor market in the earlier year - without regard to how many men were in the "prime working age" range in each of those two years. A number of things could explain this, but if in fact baby boomers are retiring from the work force faster than the age cohorts behind are replacing them, that would suggest the opposite should be true - a smaller number of new entrants (and existing entrants) would be competing for (absent economic impacts, like recessions, that would shrink the size of the number of available jobs) essentially the same number of jobs/positions - in fact, the "vacant jobs" created by baby boomer retirements should exceed the "new work force participants" coming in to the labor market - each of which should result in a higher (rather than a lower) labor participation rate.

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.